Audit

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AUDITING IN BANKING & INSURANCE
INTRODUCTION
The word Audit is derived from the Latin word Audire to hear. Originally, the accounting parties were required to attend before the auditor, who heard the accounts. I n the early stages of civilization, the methods of accounts were so crude and the number of transactions to be recorded so few that each individual was able to check for himself/ herself all his/ her transactions. But soon with the establishment of empires, a system was established to record account transactions and audit them. The person whose duty, it was to check such accounts came to be known as the Auditor. An audit is an examination of accounting records undertaken with a view to establishing, whether or not they correctly and completely reflect the transactions to which they purport to relate. Its purpose is to see that expenditure has been incurred with the sanctions of the competent authority and applied for the purpose for which it was sanctioned. It should be duly supported by vouchers, as a safeguard against fraud and misappropriation. Audit is an instrument of financial control. In its relation to commercial transactions, it acts a$ a safeguard, on behalf of the proprietor, against extravagance, carelessness or fraud on the part of the proprietor's employees in the realization and utilization of his/ her money or other assets. It ensures on proprietor's behalf, that the accounts maintained truly, represent facts and that expenditure has been incurred with due regularity and propriety. The financial transactions of a government need to be similarly 'watched. The agency employed for the purpose should be independent from the employees of Government, who are entrusted with the realization and utilization of public money or other assets, This task is entrusted, in India, to the Indian Audit and Accounts Department. So far as its audit duties are concerned, the position of the Indian Audit and Accounts Department in relation to government transactions, is to a large extent. similar to that of an auditor. In this context, Parliament1 Legislatures may be regarded iss the shareholders of the Government concern and the Executive Government as its directors. The object of this concern is. however. not profit making.
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AUDITING IN BANKING & INSURANCE Audit is one of the four pillars of democracy viz..
(i) (ii) (iii) (iv) Parliament Judiciary Press and Audit.
Firstly, Parliament is the most important organ of democracy. It is composed of people's representatives, elected on the basis of adult franchise. The members belonging to the majority party in Parliament form the government. All laws necessary for the running of the Government have to be passed by agenda , it votes taxes which provide government the resources, necessary running the administrative machinery and also votes funds for meeting expenses. Secondly, judiciary and the press are the other two pillars which necessary for administration of justice and functioning of a healthy democracy. the for the are
Lastly, it is a vital instrument of ensuring effective supremacy of Parliament over the executive. Parliamentary control consists not only in voting suppliers and approving the imposition of taxes but also in ensuring that actually the funds have been applied to the purpose for which these were voted. No business or institution can effectively carry on its activities without the help of proper records & accounts, since transactions take place at different points of time with numerous persons & entities. The effect of all transactions has to be recorded & suitably analyzed to see the results as regards the business as a whole. Periodical statements of account are drawn up to measure the success or failure of the activities in achieving the objective of the organization. This would be impossible without a systematic record of transactions. Financial statements are often the basis for decision making by the management & for corrective action so as to even closing down the organization or a part of it. All this would be possible only if the statements are reliable, decisions based on wrong accounting statements may prove very harmful or even fatal to the business. FOR EXAMPLE, if the business has really earned a profit but because of wrong accounting, show a loss, the proprietor may take the decision to sell the business at
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a loss. Thus from the point of view of the management itself, authenticity of financial statements is essential. It is more essential for those who have invested their money in the business but cannot take part in its management. FOR EXAMPLE, shareholders in a company, such persons certainly need an assurance that the annual statements of accounts send to them are fully reliable. It is a auditing which ensures that the accounting statements are authentic. The independent audit of an entities financial statements is a vital service to investors, creditors , and other participants in economic exchange. Historically, the word, auditing has been derived from the Latin word,audire which means to hear. In fact such an expression conveyed the manner in which auditing was conducted during ancient time. The auditor also express his opinion on the character of the statement of accounts prepaid from the accounting records. So examined whether they portray a true & a fair picture.
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DEFINATIONS OF AUDITING
According to General Guidelines on Internal Auditing issued by the ICAL, Auditing is defined as a systematic & independent examination of data, statements, records, operations & performances{financial or otherwise} of an enterprise for a stated purpose. In any auditing system, the auditor perceives & recognizes the prepositions before him for examination, collect evidence , evaluates the same & on this basis formulates his judgement which is communicated through his audit report.
Spicer & Pegler define Audit as An examination of the books accounts & vouchers of a business as will enable the auditors to satisfy that the balance sheet is properly drawn up so as to give true & fair view of affairs of the business & whether the profit & loss for the period according to best of his information & the explanations given to him & as soon by the book & if not in what he is not satisfied ?
According to AAS-1 basic principle governing an audit. an audit is independent examination of the financial information of any entity, whether profit oriented or not , & irrespective of its size or legal form when such an examination is conducted with a view to expressing an opinion thereon.
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SCOPE OF AUDIT
The scope of an audit as described in AAS-2 on Objective & Scope of the Audit of Financial Statements is reproduced below: The scope of an audit of financial statements will be determined by the auditor for having regard to the terms of the engagement, the requirement of relevant legislation & the pronouncements of the Institute. The terms of engagement cannot, however, restrict the scope of an audit in relation to matters which are prescribed by legislation or by the pronouncements of the Institute. The audit should be organized to cover adequately all aspects of the enterprise as far as they are relevant to the financial statements being audited. To form an opinion on the financial statements, the auditor should be reasonably satisfied as to whether the information contained in the underling accounting records & other source data is reliable & sufficient as the basis for the preparation of the financial statements.
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In forming his opinion, the auditor should also decide whether the relevant information is properly disclosed in the financial statements subject to statutory requirements, wherever applicable. The auditor assesses the reliability & sufficiency of the information contained in the underlying accounting records & other source data by: 1. Making a study & evaluation of accounting systems & internal controls on which he wishes to rely & testing those internal controls to determine the nature, extent & timing of other auditing procedures & 2. Carrying out such other tests, enquiries & other verification procedures of accounting transactions & account balances as he consider appropriate in the particular circumstances.
COMPALSORY AUDIT
Compulsory audit in the case of companies was introduced by the companies act 1956 with specific provision as to maintenance of books of account, an audit accordingly only, independent persons duly qualified & trained in the profession can act as statutory auditor in the case of a company the scope of duty , right & liabilities of the auditor & requirement as to annual accounts & the audit reports has been enlarged. In 1949 parliament enacted the Chartered Accountants Act which was vested the management & control of accounting profession in the members of the profession. Accordingly, the Institute of Charted Accountants of India (ICA) was setup under the
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Act in Delhi. The affairs of the ICAI are managed & controlled by a council comprising elected representatives of Charted accountants & nominees of Central Government. The lays down the standards of education, training professional conduct & discipline. The ICAI has issued a number of statement on Auditing , statements on Standard Auditing practices (SAPs) & Accounting Standard (AS) for guidance of the members of the profession. The companies act 1956, also prescribes a cost audit in the case of specified companies to be conducted by a Costs & Works Accountant within the meaning of the Cost & works Accountants Act, 1959. The income-tax Act, 1961 has also made the audit of accounts of certain assesses compulsory.
OBJECTIVES & SCOPE OF FINANCIAL STATEMENT AUDIT
OBJECTIVES :-
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The primary objective of an audit is to conduct an independent exam & review of the financial statement & express an opinion (i.e. an report ) about their reliability regarding the financial condition & working results as per section 227 of companies act , 1956. The auditor of the company is to state whether in his opinion the accounts give true & fair view of the state of affairs of the concern in the case of balance sheet & profit & loss account.
2. SECONDARY OBJECTIVE :While examination the book of accounts & records, the auditor has always to keep in mind the possible existence of FRAUDS & ERRORS. Innocent mistake in writing books of accounts are called ERRORS. but if errors are committed internationally & pre-planned then these errors are called FRAUDS. These frauds & errors affect the financial statements. The financial statements cannot give true & fair view if frauds & errors are present in books of accounts.
There fore the auditor has to first detect these frauds & errors & try to prevent them by introducing proper system of book-keeping.
SCOPE
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The scope of an audit as described in AAS-2 on objective & Scope of the audit of Financial statements is reproduced below:
Scope of an audit of financial statements will be determined by the auditor having regards to the terms of the engagement , the requirements of relevant legislation & the pronouncement of the Institute .The terms of engagement can not, however restrict the scope of an audit in relation o matters which are prescribed by legislation or by the pronouncement of the institute. The audit should be organized to cover adequately all aspects of the enterprise as far as they are relevant to the financial statements being audited. To form an opinion on the financial statements, the auditor should be reasonably satisfied as to whether the information contained in the underlying accounting records & other source data is reliable & sufficient as the basis for the preparation of the financial statements.
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IMPORTANCE OF AUDIT
The present structure of modern economy has the shareholders has a focal point of the legal system governing them. This is evident in not only the present structures available but also the concern for the future. The single largest concern at the moment seems to be CORPORATE GOVERNANCE. The image of the company is of great concern to the company. Transparency in accounts & an audit that will enforce the financial discipline is the most crucial aspect of maintaining this public image. Audit is the examination of the financial accounts of the company. There is belief that the presence of independent, competent & vigilant authority exercising strict audit, control, ensuring that all the required disclosures have been made by the directors from time to time & the true & fair view of the financial position. Thus, the companies act, 1956 has provided for appointed , remuneration, removal, etc of the auditors. Also the agreements of various stock exchange have made provisions to ensure independent auditing. The annual audit is on of comer stories of corporate governance. Given the separation of ownership from management, the auditors are required to report on their stewardship by means of the annual report & financial statements sent to the shareholders. The audit provides on external & objective check on the way in which the financial statements have been prepared & presented, & it is an essential part of the check & balances required. The question is not whether there should be an audit, but how to ensure its objective & effectiveness. Audits are reassurance to everybody who has a financial interest in companies, quite apart from their value to board of directors. The most direct method of ensuring that companies are accountable for their actions is through open disclosure by boards & through audits carried out against strict accounting standers.
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AUDIT PLANNING
Planning helps an auditor to conduct an audit in an effective &efficient & timely manner.
NEED OF AUDIT PLANNING: Appropriate attention is devoted to important aspect of audit. Potential problems are identified Timely completion of the work Proper utilization of manpower Co-ordination of work .
STEPS FOR PLANNING AN AUDIT

Knowledge of clients business Developing the overall plan Developing the audit programme Review of the audit plan/programme
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AUDIT SAMPLING
Sampling is one audit tool that allows the auditor to draw inference from tests of a subject of a clients transactions.
OBJECTIVES
The purpose of this standard is to establish standards on the design & selection of audit sample & the evaluation of the sample results.
STEPS IN A SAMPLING PLAN

i. ii. iii. iv. v. vi. vii. viii. ix. Specify the audit objectives Define the population & no of population Specifying the sampling unit Selecting the sampling method such as random, systematic & haphazard Specify the sample parameters Determine the sample size Choosing a sample selective technique Drawing the sample Evaluating a sample
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x. xi. xii. Determine adjustment to original plan if needed Evaluating any changes Formulating a conclusion
TYPES OF AUDIT
EXTERN AL (STATUT ORY) DUE DILIGEN CE INTERNA L
FINANCI AL STATEM ENT
TYPES OF AUDIT
COST
MANAG EMENT
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TYPES OF AUDIT ARE EXPLANNED BELOW : External (statutory) audit :When audit is made compulsory by the law it is called statutory audit. It is compulsory & mandatory as per The Companies Act, 1956. It is known as STATUTORY AUDIT. In this audit the auditor concentrates on financial information i.e. financial statements etc, therefore this audit is also known as financial audit. External auditor is appointed by the shareholders of the company. He is appointed as per the provisions of section 224 of companies act , 1956. This appointment is from 1 AGM to another AGM. After conducting external audit, the external auditor prepares audit report & submits to SHAREHOLDERS. It can be undertaken only by a practicing C.A. i.e. he should have passed the final exam of ICAI, he should have Certificate Of Membership (COM) & Certificate Of Practice (COP). In external auditing the external auditor before starting the audit, prepares audit plan & audit programmes. He decides the audit procedures to be followed & that transactions to be checked.
Internal audit :It means independent appraisals of various activities within the organization. It is a review of accounting, financial & other business practices. The person carrying on internal audit is called INTERNAL AUDITOR. It is not necessary that he must be a C.A., but he should be competent & must have the knowledge of accounts, law, finance ,etc. He is appointed by the management & not by the shareholders.
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It is carried on throughout the year. In this audit, the auditor ensures that there is a proper internal control system within the organization. On completion of internal audit the internal auditor prepares an internal audit report. This report is submitted to management & not to shareholders.
Cost audit :COST AUDIT is defined as the verification of correctness of cost records & check on the adherence to the cost accounting plan. It is the audit of cost records. It is an audit process for verification of the cost of manufacture or production of any article on the basis of accounts relating to utilization of material, labour & other items of cost maintained by the company with the company with the accepted principles of cost accounting.
Management audit :Management audit is The comprehensive examination of an enterprise to appraise its organizational structure ,policies and procedures in order to determine whether sound management exists at all level , ensuring effective relationship with the outside world and internal efficiency. Management audit is concerned with review of the past performance to ascertain whether it is in tune with the objective ,policies and procedures. It is the method used to evaluate the management at all levels through the organization.
Financial statement audit :Financial statements of a company includes balance sheet ,statement of profit and loss and other statements and explanatory notes which forms part thereof ,issued for the use of share holders ,creditors ,employees and public at large. These are known as general purpose financial statement.
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The objective of an audit of financial statement, prepared within a frame work of recognized accounting policies and practices and relevant statutory requirements is to enable an auditor to express an opinion on such financial statement. The auditors opinion helps determination of the true and fare view of the financial position and operating results of company.
Due diligence audit :In lay terms, due diligence is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party or himself. The term due diligence is used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. In financing, due diligence is the process of research and analysis that takes place in advance of an acquisition investment, business partnership or bank loan in order to determine the value of the subject of due diligence or whether there are any skeletons in the closet
THE AUDITOR
The person conducting audit is known as the auditor. He makes a report to the person appointing him after due examination of accounting records & the accounting statement in the form of an opinion on the financial statements. The opinion that he is called upon to express is whether the financial statement reflect true & fair view. In India under the authority of Companies Act, 1956 only Chartered Accountant are professionally qualified for the audit of the account of companies. The Charted accountants are in a position to undertake auditing of almost any accounting aspect, unlike cost accountants who sphere has been restricted to audit of cost accounting records & statements.
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An official whose job it is to carefully check the accuracy of business records. An auditor can be either an independent auditor unaffiliated with the company being audited or a captive auditor, and some are elected public officials. The term is sometimes synonymous with "comptroller." Auditors are used to ensure that organizations are maintaining accurate and honest financial records and statements. Auditors can work for many different entities, such as the IRS or a state government. Auditors are also found in the private sector at accounting firms. There are both internal and external auditors; internal auditors are usually employees or contractors with the company they are auditing, while external auditors generally work either directly for or in conjunction with governmental agencies.
QUALIFICATION & DISQUALIFICATION OF AUDITORS [Section 226]
Only individual, possessing the requisite knowledge and skill, can be appointed as auditor of the company. The auditor should be independent in carrying out his work so that he is able to give an unbiased opinion based on an objective assessment of facts. Thus, he
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should have no interest, financial or otherwise and whether directly or indirectly, in the company and/or its management. A person, who is Chartered Accountant within the meaning of Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership firm where of all the partners are Chartered Accountants holding certificates of practice, may be appointed as auditor of a company. The following persons cannot be appointed as auditor of a Company: (a) An officer or employee of the company; (b) A person who is partner with an employee of the company or employee of an employee of the company; (c) Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who have guaranteed to the company on behalf of another person for a sum exceeding Rs. 1,000/-. (d) A person who is holding any security of that company, after a period of one year from the date of commencement of Companies (Amendment) Act, 2000. If an auditor, after his appointment, becomes subject to any disqualification mentioned above, he shall be deemed to have vacated as such.
APPOINTMENT OF AUDITORS
GENERAL RULE OF APPOINTMENT

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To ensure compliance with the statutory requirement & accountability to the shareholders section 224 of the companies act, 1956 makes the appointment of an auditor or auditors by the company in general meeting, before which accounts one laid mandatory. An auditor thus appointed at a general meeting holds office from the conclusion of that meeting until the conclusion of the next such annual general meeting (AGM). The appointment of auditors at the AGM ensures that they are appointed by the shareholders. The exception to this role of appointment at the AGM is the appointment of the first auditor or auditors by the board of directors of a company the board of directors of the company have to appoint the first auditor within within one month from the date of its registration such auditors hold office until the conclusion of the first AGM. The remuneration of the first auditor is fixed by the board or the general meeting as the case may be. The company may, at a general meeting remove the first auditor appointed by the Board & appoint in its place another auditor, at whose nomination a specific notice has been given. An auditor appointed in the above manner should be informed of his appointment within seven days & he is required to inform the Registrar within thirty days whether or not he has accepted the appointment. The obligation to give notice to the Registrar is cost only on auditors appointed under sub-section (1) of section 224. Persons appointed as auditors under sub-section need not inform the Registrar. Hence, the first auditors who are appointed by the Board of Directors are under no obligation to inform the registrar.
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CASUAL VACANCY :-
A casual vacancy is a vacancy of temporary nature that may occur during the currency of the year after an appointment is made by the company at its general meeting. Thus, a casual vacancy is not one created by a deliberate omission on the part of the company to appoint an auditor at an general meeting. It denotes a vacancy caused by a validity.
Appointed Auditor ceasing to act as such, due to death, disqualification etc. the auditor appointed in a casual vacancy shall hold office till the conclusion of the next AGM.
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CEILING ON NUMBER OF COMPANY AUDITS
Before an appointment or re-appointment of auditors is made, a certificate in writing is required by the company from the auditor regarding compliance of ceiling limit on total number of audits. Sub section (1B) places a ceiling on the number of company audits which a CA in full time, employment or a firm of CA, can conduct. The limitation on number of company audits vide explanation land 11 is applicable to 1. A member of the institute of chartered accountants of India who, while being in wholetime employment elsewhere, also holds operating agency certificate of practice from the institute & 2. A practicing firm of charted accountants. In order words, the section does not cover (a) a charted accountants, who while in parttime employment elsewhere holds a certificate from the institute & (be) a CA who is practicing in his sole capacity (i.e. a proprietor) & not as a part of a firm of CAs. As per companies act, 1956 the specified number of companies audits which a auditor is allowed to handle, that is, the overall ceiling limit on company audit is 20 of this 30 companies, not more than 10 should be companies should have a paid-up capital of Rs. 25 lacks or more. In the case of a firm, the specified number is to be calculated with reference to each partner in the firm, who is not in full time employment alse where. For the purpose of ceiling on number of companies audits in the case of a partner of a firm who is also a partner in another firm, the total number of audits held by him, individually or by different firms an his accounts should be taken into consideration. In computing the number of audits for the above purpose, joint audits are to be taken into account, that is each of the firms, appointed as Joint auditors of company shall count the audit assignment as one company audit.
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The department of company affairs has clarifies that the branch audit are not to be included while calculated the specified number, the branch auditor of an insurance company appointed under section 28 audit the accounts of the specific branch only for which he is appointed & forwards his report to the auditor appointed under section 224 of the act. Hence the branch auditor cannot be equated with the company auditor cannot under section 224 of the act, who has to report to the AGM on the accounts of the companies as a whole including the accounts audited by the branch auditor
APPOINTMENT & RE-APPOINTMENT OF AUDITOR BY SPECIAL RESOLUTION
Section 224 A was introduced by the companies amendment act, 1974 enamoring the cases in which an auditor can be appointed only by special resolution, where 25% or more of the subscribed share capital of a company is held jointly or singly by a public financial institution, a government company, central government, any state government, any institution established by a state act in which the state government hold not less than 50% of the subscribe capital, a nationalized bank or an insurance company carrying general insurance business , the appointment or re-appointment of an auditor can be made only be made by a special resolution.. Thus this provision implies that a company in which 25% or more of a subscribed share capital is held by any of the aforesaid institutions can appoint or re-appoint auditor with the concurrent of such institution.
If a company in which 25 % or more of subscribe share capital is held by the institution listed in this section omits or fails to pass at its AGM, a special resolution appointing or re-appointing an auditor, it shall be deemed that no auditor has been appointed by the company. Even if the ordinary resolution is passed unanimously, the auditors can be deemed to have been validly appointed.
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In such an event, the company is required to give notice of that fact within 7 days to the central government as required under section 224 (3)& the central government may appoint a person to fill the vacancy.
RE-APPOINTMENT OF RETIRING AUDITOR
At any AGM a retiring auditor is reappointed, except in the following 4 situation, 1. He is not qualified for re-appointment. 2. He has given to the company notice in writing o his unwillingness to be re-appointed. 3. A resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed. & 4. Where notice has been given of an intended resolution to appoint some persons in the place of a retiring auditor & by reason of the death, incapability or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with.
The provision on re-appointment is a step in the direction of ensuring auditor independence as the auditor cannot be replaced except in the specific circumstances enumerated in the act.
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However, the retiring auditor cannot deemed to be re-appointed or automatically reappointed at the AGM. The expression shall be re-appointed used in the provisions in the companies act postulates some action on the part of the company resulting in the re-appointment of the retiring auditor, thus , the passing of resolution for this purpose at the AGM is essential for the re-appointment of the retiring auditor if he is still qualified & willing to act.
FINANCIAL STATEMENTS AUDIT OF BANKS
The audit of banks is made compulsory under the enactments governing the Banks. The Banking Regulation Act, 1949 deals with the matters including accounts & audit of various banking institutions. The Banking Companies Act, 1970 regulates the functioning of nationalized banks. Certain provisions of Banking Regulation Act also apply to nationalized banks. Besides these enactments, Reserve Bank of India has regulatory powers to regulate the functioning of all banks under its statute. From time to time it issues circulars & guidelines to be followed by banks. The audit of banks is a specialized task. It requires a thorough knowledge of various enactments affecting banks, understanding the operations of banks, their accounting system & above all appreciation of audit aims of bank audit.
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The auditor of banks should be well-acquainted with the relevant provisions of the special enactments that govern different types of banks, particularly those which affect the various items of the financial statements. They should also be conversant with legal & financial implications of the nature of business carried on by the banks & the types of transactions that arise in their day to day operation.
ROLE OF RBI IN CASE OF BANK AUDIT
The audit of a banking company is different from the audit of commercial units. In India, there are four types of bank i.e. Commercial Banks, Regional Rural Banks, Cooperative Banks & Private Banks. The provisions of numerous Acts are applicable to different types of banking companies. Therefore, the auditor should know the provisions of the Acts, which are applicable to the type of bank which he is conducting the audit. However, the Reserve Bank of India (RBI) has regulatory power to regulate the functioning of all Banks.
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The RBI issues circulars & guidelines from time to time. The banking companies have to follow these circulars & guidelines. Moreover, RBI is empowered to give directors to banking companies in regard to advances granted to directors. Banks may require to obtain more security or refuse further loan or recall the loans already granted to them. The Banking Companies have to submit monthly returns in the prescribed format regarding loans & advances to directors to RBI. The RBI has issued circulars requiring banks to meet capital adequacy norms. According to section 18 of the banking regulation act, each banking company must maintain cash reserve ratio with RBI for a sum equal to 3 to 5 % of its time & demand liabilities. The RBI has powers to increase the percentage up to 15%. Besides, every bank must maintain Statutory Liquidity Ratio for a sum prescribed by RBI. This ratio has to be maintained in the form of cash, gold or innumerable approved securities. For the purpose of appointment, re-appointment & removal of auditor of banking companies, the approval of RBI is required to be obtained. The statutory auditors of nationalized banks should send their report to Central Government & copies of audit report to RBI & to the bank. The RBI has to supervise the functioning of the banks regularly, Thus, the role of RBI as a regulatory body is more critical for the smooth running of the Banking Industry in India.
AUDIT OF BANKING COMPANIES

The laws governing the audit of banking companies are as follows
Nationalized bank
Banking companies(acquisition &

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transfer of undertaking) Act 1980 & certain provisions of Banking Regulation Act 1949 Banking Regulation Act 1949 & those provisions of companies Act 1956, which are consistent with the Banking Regulation Act 1949 Co-operative Societies Act 1912 relevant state laws governing cooperative societies, part v of Banking Regulation Act 1949 Regional Rural Bank Act 1976 State Bank of India Act 1955 , State Bank of India Act (subsidiary Banks ) Act (1959) & certain provisions of Banking Regulation Act 1949
Non- nationalized bank
Co-operative banks
Regional rural bank State bank of India
ACCOUNTING PROVISIONS
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A banking company incorporated in India should prepare, at the end of each accounting year, a balance sheet & profit & loss account in respect of all its business. These accounts must be as prescribed in the forms set out in Third Schedule to Banking Regulation Act. The balance sheet should classified the items as follows .
LIABILITIES
Capital Reserve & surplus Deposits Borrowing Other liabilities & provisions
ASSETS
Cash & balance with reserve bank of India Balances with banks & money at call & short notice Investments Advances Fixed assets Other assets
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APPOINMENT OF AUDITOR OF BANKING COMPANY
A banking company, a nationalized bank, is required to appoint with the previous approval of the Reserve Bank, auditor for the audit of its accounts. The auditor has to be a person who is duly qualified under law to be an auditor of the Companies. Thus, the auditor has to be a person who is qualified to act as an auditor of a company under section 226 of the Companies Act, 1956 & who does not attract any disqualification laid down therein. In case of a regional rural bank, the auditor is appointment of the auditor of a cooperative bank is governed b the relevant Cooperative Societies Act.
The auditor of a nationalized bank, the State Bank of India & each of its subsidiaries & regional rural bank is appointed by the Board of Directors of the bank concerned, whereas the auditor of a banking company is appointed at the annual general meeting of the shareholders.
As far as the branches of nationalized banks, state bank of India & its subsidiaries are concerned, the Reserve Bank of India maintains a panel which is prepared by the Institute of Chartered Accountants of India. For this purpose the Institute publishes an empanelment form normally in the months of April or May issue of its journal. The remuneration of the statutory central auditors as well as the branch auditors is fixed on the basis of certain norms laid down by the Reserve Bank.
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AUDIT OF COOPERATIVE BANKS:For the last few years, the Government has given much encouragement to the cooperative institutions because of the policy of establishing a socialistic pattern of society. The co-operative societies are established under the co-operative Societies Act, 1912. Some states like Maharastra, Tamil Nadu, Bengal, Bihar etc., have enacted Cooperative Societies Act for their own states according to the provisions of the state legislation will be applicable. We shall for the purpose of this chapter, deal with the Co-operative Societies Act, 1992. It may be stated here that the provisions of the companies Act are not applicable to the Co-operative Societies.
PRIVILEGES OF REGISTERED SOCIETIES:
The following are privileges which a registered society can enjoy:
It shall have the privileges of a body corporate. It will have perpetual succession & a common seal. It will have power to hold property. It can enter into contracts with others.
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It can be sued by others & it can also sue others
Its shares cannot be attached or sold under any decree or order of a court in respect of any debt or liabilities incurred by its members
NAMES OF AUDIT FIRMS APPROVED FOR APPOINTMENT AS STATUTORY

BANK OF MAHARASHTRA
1. 2. 3. 4. 5. 6. M/s Ray & Co , Kolkata M/s B Chhawchharia & Co, Kolkata M/s J C R & Co, Mumbai M/s Jodh Joshi & Co, Nagpur M/s N Kumar Chhabra & Co., Chandigarh M/s DSP & Associates, New Delhi
CENTRAL BANK OF INDIA

1. 2. 3. 4. 5. 6. M/s Sagar & Associates , Hyderabad M/s G S A & Co, New Delhi M/s K. S Aiyar & Co., Mumbai M/s Ghiya & Co., Jaipur M/s D. Rangaswamy & Co., Chennai M/s SAMSAND & Associates, New Delhi
CORPORATION BANK
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1. 2. 1. 3. 4. 5.

M/s R DevendraKumar & Associates, Mumbai M/s Vinod Kumar & Associates, New Delhi 3 M/s O P Totla & Co., Indore M/s Rajendra K Goel. & Co., New Delhi M/s K. Varghese & Co., Kochi M/s V. Narayanan & Co., Chennai
DENA BANK
1. 2. 3. 4. 5. 6. M/s Gokhale & Sathe , Mumbai M/s B. K. Khare & Co., Mumbai M/s Gandhi Minocha & Co., New Delhi M/s P K Chopra & Company, New Delhi M/s Avanish K Rastogi & Associates, Lucknow M/s S C Bapna & Associates, Vadodara
INDIAN BANK
1. 2. 3. 4. 5. 6. M/s Suri & Co, Chennai M/s Kalyanasundaram & Co., Chennai M/s Ganesan & Company, Chennai M/s Chandran & Raman , Chennai M/s S Mohan & Co., New Delhi M/s A B P & Associates, Bhubaneswar
INDIAN OVERSEAS BANK

1. 2. 3. 4. M/s Varma & Varma Kochi M/s Bhaskaran & Ramesh Chennai M/s M. Bhaskara Rao & Co., Hyderabad M/s PKF Sridhar & Santhanam, Chennai
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5. M/s Mittal Gupta & Co, Kanpur 6. M/s S. R. Mohan & Co., Hyderabad
GUIDANCE NOTE ON AUDIT OF BANKS (REVISED 2008)
Audit of banks is an important area of professional opportunity for the members. This opportunity, however, comes with a heavy responsibility too both in terms of the expectations of the government, the regulator as well as the public at large, in addition to the professional responsibility to keep update with the professional pronouncements issued by the Institute as well as the circulars issued by the Reserve Bank of India from time to time. The Institute, from time to time, has been bringing out a number of non-authoritative publications on audit of banks as and also publishing articles on the topic in its monthly journal. The benchmark publication of the Institute in this area has been the Guidance Note on Audit of Banks, an authoritative pronouncement of the Institute. The 2008 edition of the Guidance note has been divided into four distinct parts. Part I contains chapters dealing with the information about the banking industry, its legal framework, accounting and auditing framework. This Part also contains chapters on significant financial statement items- their presentation in the financial statements, relevant RBI guidelines, etc. The second part of the Guidance Note has been devoted to the basic audit considerations in branch office visa- a -visa head office, audit procedures for each of the financial statement item discussed in part I. Part III and IV contain guidance on head of/ branch office LFAR and special aspects such as Ghosh Jilani Committee requirements, SLR
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certification, etc., respectively.
The 2008 edition of the Guidance Note has been updated from the 2006 edition to include the current requirements of not only the latest RBI master circulars, but also other important circulars such as outsourcing of financial services by banks, stress testing, etc as well as other aspects such as service tax, etc. The Guidance Note comes with a CD containing important RBI circulars issued up to 15th Feb. 2008.
BANKING & FINANCIAL ACTIVITIES AND RISKS:
The development of Information Technology in banks and financial institutions, both in the front and back office operations, has facilitated greater systemic efficiency in the banking and financial sector. It has, at the same time, introduced new areas of risk. Risk is inherent in the traditional banking and financial activities. However, risk in a computerized and networked environment is multifarious such as operational risk, reputational risk, legal risk, credit risk, liquidity risk, interest rate risk, foreign exchange risk etc., as briefly discussed here under :
Operational risk:It arises out of the problems concerning the reliability and integrity of the Information Systems. The extent of such risks depends on the security features, design and implementation of security policies and procedures, adopted in an electronic banking system.
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Network security, database security, data integrity, appropriateness of the security policies and practices and the likely misuse of the information and information resources by the employees, customers and third parties are some of the factors, which require to be addressed for risk measurement in a computerized and networked environment in the banking and financial sector.
Reputational risk:IT is very closely intertwined with the other kinds of risks. Failures, frauds, lack of proper delivery or non-delivery of information to customers, monetary loss to customers, lack of personal touch and litigation are some of the factors which cause loss of reputation to an organization. Lack of reputation is a very serious problem for any business and the banking/ financial institution is no exception. Lack of reputation is usually due to serious security loopholes and lapses in the information systems, lack of fast and efficient delivery channels for retail banking and financial services and the markets general lack of trust in electronic banking/financial channel, say credit cards, which constitutes one type of electronic money or e-cash or plastic money. The occurrence of external and internal attacks on an organizations information and Information Systems may cause serious damage to public confidence in the organization.
Legal risk:It emanates from various factors such as the lack of adequate legal framework, inappropriate, ineffective, irrelevant and inapplicable Information Technology Act, inappropriate customer secrecy obligations on the part of the banks and financial institutions, inadequate privacy policy for the customers, Certification Authority risk, Trans-border financial transactions with very little or no legal backing or international law for the same, lack of legal provisions for public trans-border communication network such as Internet, other private networks etc.
Credit risk:It arises when the parties default in repayment of loans and advances. In computerized environment, credit risk gets enhanced because credit is channelized through electronic channels, which transgress the barriers of time and space. Credit appraisal in order to ascertain the credit worthiness of a prospective customer is difficult to verify as multiple remote customers may access the bank round the clock for credit through nontraditional channels of communication with little or no ways and means being available with the banks to completely ascertain the veracity of their claims within the set limits of response time, as per the guidelines for Customer Relationship Management. In cases of credit flow through trusted third parties like the operators of electronic interbank/ institutional
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payment gateways, any default on the part of the third party operators in assessing the credit worthiness of the final customers would boomerang on the bank and has to be considered as another factor contributing to credit risk. Credit risk assumes great importance in an electronic banking environment.
Liquidity risk:It arises when an entity fails to meet its payment obligations in a timely manner. Banks, which may provide the facility of electronic money, shall be liable to arrange for adequate funds in case of redemption or settlement on electronic money. Any default could lead to legal wrangles and loss of liquidity.
Interest Rate risk:It arises due to variation in the interest rates. In case of banks offering electronic money, any fluctuation in the interest rate, which affects the value of the assets, created by electronic money, are liable to create interest rate risk liability on the bank.
Cross-border Transactions Risks:Electronic banking envisages a borderless world of financial services and therefore, risks, arising out of variation in the exchange rate, are likely to create additional risks for a bank. Different exchange rates, existing in different countries, mean that the banks need to analyze not only the exchange rate fluctuations with respect to the currencies of their respective countries, but exchange rate fluctuations between two or more (other) countries also. This kind of risk is likely to arise in case the bank has to cover losses due to unfavorable exchange rate fluctuations or in case, the third country participants in an electronic payment system are unable to fulfill their financial obligations due to social, economic and political factors in their respective Countries.
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CONCLUSION FOR BANK AUDIT

Audit is necessary for all companies registered under companies act. Every company has to appoint an auditor for keeping audit. Audit helps companies to know where they are standing. Audit helps to know their expanses, income , assets, and liabilities of the company. A banking companies are requires maintaining the books of account in accordance with section 209 of the companies act, 1956. Banking generally a sound internal control system their day to day transaction. The auditor has to evaluate such system carefully. Auditor plays major role in preparing audit, because it is one of the major criteria of knowing the company. The auditor has to evaluate such system carefully. The fundamental requirement of an audit, as regards reporting on statement of account can be discharged from the examination of the internal checked and verification of assets and liabilities by making a comparison and reconciliation of balance with those in the year and that of amount of income and expenses by application of test checks.
The banking regulation act casts greater responsibilities on the directors of banks as compared to those of other companies in the matter of supervision over their working. Therefore, they exercise, or are expected to exercise greater supervision over the affairs of bank. The auditor is entities to rely on such supervision and to limit his checking to test checks. The financial position of a bank is depended on the condition of assets, loan, investment, cash balanced and those of its liabilities and fund. Their verification form an important part of the balance sheet. Most of the bank have their own internal audit or inspection department entrusted with the responsibilities of checking the account of various branches. The statutory auditor may not, therefore, duplicate work.
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AUDIT OF COMPANIES CARRING ON INSURANCE BUSINESS
INTRODUCTION
Insurance companies in India are governed the insurance act 1938 though consequent to the nationalization of life insurance business in 1956, the provisions of respective legislations also apply to them.
LIFE INSURANCE
The life insurance corporation act 1956 is concern with regulation & control of life insurance corporation. Section 26 of Act deals with the funds of the corporation, section 26 with actuarial valuation, & section 28 with the annual reports of the activities of the corporation as also utilization of the surplus. Under section 25, the account of the corporation are required to be audited by the auditors who are appointed by the corporation with the previous approval of the central government, which is also empowered to fixes their remuneration. The auditors are required to submit their reports to the corporation & forward a copy therefore to the central government which, on its part shall cause the same to be laid before both Houses of Parliament as soon as after its receipts as may be.
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GENERAL INSURANCE
The General Insurance Business (nationalization) Act, 1972 is concern with regulation & control of the general insurance business, which means fire & marine insurance & miscellaneous business. However, in many a case, the provision of insurance act, 1938 continue to apply to General Insurance Business. The opening up of the insurance sector required better regulation of the insurance sector. The government of India enacted the Insurance Regulatory & Development Authority (IRDA) Act in the year 1999. Pursuant to this act an independent authority, IRDA was formed in the year 1999 to protect the interest of holders of insurance policies, to regulate, to promote & ensure orderly growth of the insurance industry within the framework of the IRDA Act.
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REGISTRATION OF INSURANCE COMPANY

Every insurer seeking to carry out the business of insurance in India is required to obtain a certificate of registration from the IRDA prior to commencement of business. The preconditions for applying for such registration have been set out under t he Act of 1938, the IRD Act and the various regulations prescribed by t he Authority.
GENERAL REGISTRATION REQUIREMENTS

The following are some of the important general registration requirements that an applicant would need to fulfill : (a) The applicant would need to be a company registered under the provisions of the Indian Companies Act, 1956. Consequently, any person intending to carry on insurance business in India would need to set up a separate entity in India. (b) The aggregate equity participation of a foreign company (either by itself or through its subsidiary companies or its nominees) in the applicant company cannot not exceed twenty six per cent of the paid up capital of the insurance company. However, the Insurance Act and the regulations there under provide for the manner of computation of such twenty-six per cent.
(c) The applicant can carry on any one of life insurance business, general insurance business or reinsurance business. Separate companies would be needed if the intent were t o conduct more than one business. (d) The name of the applicant needs to contain the words insurance company or assurance company.
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CAPITAL STRUCTURE REQUIREMENTS.

The applicant would need to meet with the following capital structure requirements: (a) A minimum paid up equity capital of rupees one billion in case of an applicant which seeks to carry on the business of life insurance or general insurance. (b) A minimum paid-up equity capital of rupees two billion, in case of a person carrying on exclusively the business of reinsurance .In determining the aforesaid capital requirement, the deposits to be made and any preliminary expenses incurred in the formation and registration of the company would be included. A promoter of the company is not permitted to hold, at any time, more than twenty-six per cent of the paid-up capital in any Indian insurance company. However, an interim measure has been permitted percentages higher than twenty six percent are permitted if the promoters divest, in a phased manner, over a period of ten years from the date of commencement of business, the share capital held by them in excess of twenty six per cent.
PROCEDURE FOR REGISTRATION
OBTAINING
CERTIFICATE
OF
An applicant desiring to carry on insurance business in India is required to make a requisition for a registration application t o the IRDA in a prescribed format along with all the relevant documents. The applicant is required to make a separate requisition for registration for each class of business i.e. life insurance business consisting of linked business, non-linked business or both, or general 7 insurance business including health insurance business. The IRDA may accept the requisition on being satisfied of the bonfires of the applicant, the completeness of the application and that the applicant will carry on all the functions in respect of the insurance business including management of investments etc. In the event that the aforesaid requirements are not met with, the Authority may after giving the applicant a reasonable opportunity of being heard, reject the requisition. Thereafter, the applicant may apply to the Authority within thirty days of such rejection for reconsideration of its decision. Additionally, an applicant whose requisition for registration has been rejected, may approach the Authority with a fresh request for registration application after a period of two years from the date of reject ion, with a new set of promoters and for a class of insurance business different than the one originally applied for.
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In the event that the Authority accepts the requisition for registration application, it shall direct supply of the application for registration to the applicant. An applicant, whose requisition has been accepted, may make an application along with the relevant documents evidencing deposit, capital and other requirements in the prescribed form for grant of a certificate of registration. If, w hen considering an application, it appears to the Authority that the assured rates, advantages, terms and conditions offered or t o be offered in connection with life insurance business are in any respect not workable or sound, he may require that a statement thereof to be submitted to an actuary appointed by the insurer and the Authority shall order the insurer to make such modifications as reported by the actuary. After consideration of the matters inter alia capital structure, record of performance of each promoters and directors and planned infrastructure of the company, the Authority may grant the certificate of registration. The Authority would, however, give preference in grant of certificate of registration to those applicants w ho propose to carry on the business of providing health covers to individuals or groups of individuals. An applicant granted a certificate of registration may commence the insurance business within twelve months from the date of registration. In the event that the Authority rejects the application for registration, the applicant aggrieved by the decision of the Authority may within a period of thirty days from the date of communication of such rejection, appeal to the Central Government f or reconsideration of the decision and the decision of the Central Government in this regard would be final.
RENEWAL OF REGISTRATION
An insurer who has been granted a certificate of registration should renew the registration before the 31 day of December each year, and such application should be accompanied by evidence of fees that should be the higher of fifty thousand rupees for each class of insurance business, and one fifth of one per cent of tot al gross premium writ ten direct by an insurer in India during the financial year preceding the year in which the application for renewal of certificate is required to be made, or the application for renewal of certificate is required t o be made, or rupees fifty million whichever is less;
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(and in case of an insurer carrying on solely re-insurance business, instead of the total gross premium written direct in India, the total premium in respect of facultative reinsurance accepted by him in India shall be taken into account). This fee may vary according to the total gross premium writ ten direct in India, during the year preceding the year in which the application is required to be made by the insurer in the class of insurance business to which the registration relates but shall not exceed onefourth of one percent of such premium income or rupees fifty million, whichever is less, or be less, in any case than fifty thousand rupees for each class of insurance business. However, in the case of an insurer carrying on solely re-insurance business, the total premiums in respect of facultative re-insurance accepted by him in India shall be taken into account.
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PRINCIPLES OF INSURANCE LAW

Where there is a positive enactment of the Indian legislature, the language of the statute is applied t o the facts of the case. However, the common law of England is often relied upon in consideration of justice, equity and good conscience.
GOOD FAITH
A contract of insurance is a contract uberrimea faded i.e. a contract of utmost good faith. This is a fundamental principle of insurance law. Both the parties t o the contract are required to observe utmost good faith and should disclose every material fact known to them. There is no difference between a contract of insurance and any other contract except that in a contract of insurance t here 33 is a requirement of utmost good faith. The burden of proof to show non-disclosure or misrepresentation is on the insurance company and the onus is a heavy one. The duty of good faith is of a continuing nature in as much no material alteration can be made to the terms of the contract without the mutual consent of the parties. Just as the assured has a duty to disclose all the material facts, the insurer is also under an obligation to do the same . The insurer cannot subsequently demand additional premium nor can he escape liability by contending that the situation does not warrant the insurance cover. The Insurance Act lays down that an insurance policy cannot be called in question two years after it has been in force for two years. This was done to obviate the hardships of the insured w hen the insurance company tried to avoid a policy, which has been in force for a long time, on t he ground of misrepresentation. However, this provision is not applicable when the statement was made fraudulently. The Marine Insurance Act, 1963 (Marine Insurance Act) lays down that the insured must disclose all the material facts before t he contract is concluded. The disclosures by the assured or by his agent should be true. The insured is deemed to know every circumstance, which in the ordinary course of business, ought to be known by him. The insurer may avoid the contract if the assured fails to make such disclosure or if the representation made is untrue.
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However, circumstances which diminish the risk, or which are presumed to be known by the insurer or information which is waived by the insurer or any circumstance which is superfluous to disclose by reason of any express or implied warrant y need not be disclosed, in absence of any enquiry. In India the post contractual duty of good faith is very strict. The situation, though, has changed in England through a recent decision of the House of Lords. The decision in the Star Sea Case lays down that the duty of good faith in insurance contracts continues after the inception of the policy, but the duty is far less strict than it was prior to the commencement of the contract. This is because it would enable the insurers to avoid the whole policy abilities for a postcontractual breach, which had no effect when the policy was drawn initially. However, this position has yet to be accepted by the Indian courts.
CONDITIONS
Conditions are terms which prescribe the limitations under which an insurance policy is granted and which specify the duties of the assured. They can be either conditions precedent or subsequent. Conditions precedent are those, which are essential for the creation of a valid contract, the non satisfaction of which makes the contract void abilities. Conditions subsequent relate to the continuance of a valid contract, the non- fulfillment of which leads t o the avoidance of the contract from the date of the breach. They can be further classified into express conditions and implied conditions. Implied conditions are those, which are implied by law to apply t o every contract of insurance irrespective of any specific inclusion or reference to them such as insurable interest, good faith etc. A condition, which seeks to reduce or curtail the period of limitation and prescribes a shorter period than that prescribed by law is void. However, the insured is absolved once it is shown that he has done everything in his power to keep, honor and fulfill the promise and he himself is not guilt y of a deliberate breach. An insurer cannot take recourse to a condition, which has not been mentioned in the policy to reduce his liability. However, an insurance policy may not curtail the right but may merely provide for forfeiture or waiver of any such right and such a right would be enforceable against either party
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AUDITING OF GENERAL INSURANCE COMPANIES
There are several areas in insurance accounting and finance, both at the corporate level and Operational level that need an auditors focused attention and critical review. This article intends to deal with some of the important ones.
THE INDUSTRY
General Insurance sector is next only to the banking industry in terms of importance among the economic barometers of the nation. While the banking industry is creating assets and consequently national wealth, the insurance industry is protecting such wealth to the tune of several zillions of rupees. The industry is also very unique in the sense that it thrives in selling promises and marketing uncertainties and making good money in the process, cycling such money back in to the nation building process. Cash-rich, again next only to banking, it is also the only industry that is global, both by design and default, in its reach and perspectives and hence its numbers are also massive. The industry, which was opened up for private sector participation with a defined limit of foreign equity, after three decades of public sector monopoly, is in the process of rediscovering itself. It has become the cynosure of all discerning eyes, with more than a dozen private companies sponsored by the top industrial empires of the country teaming up with some of the best international names, have sprung in the horizon to increase the size of the cake several fold and then to take their due slices of it.
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ACCOUNTS AND AUDIT

The various stakeholders in the general insurance companies such as the Government (as the owners of the PSU companies), Indian shareholders and the JV partners (in case of private companies), policyholders, reinsurers who do business with the companies etc. consider the published financials of the Insurance Companies as the symbol of the strength and more so because such financials bear the attestation of the Chartered Accountants, who audit the companies. The excitement among Chartered Accountants that is perceptible in late March and early April in connection with Bank Audits, their eagerness to get acquainted with the latest on NPA provisioning norms and their self-propelling attitude to attend the Bank Audit seminars in huge numbers are all normally not very pronounced even among those who get the insurance audit allotments. For some unfathomable reasons, the auditors do not display any enthusiasm in acquiring the necessary domain expertise of this industry, the financial concepts of which are riddled with unique and specialized concepts such as heavy influence of the bottom lines by various estimations, statutory limitation on management expenses, relationship between the capitalizations and risk bearing capacities, protection of policyholders interests vis--vis expectations of stakeholders etc. This lack of domain expertise sometimes leads to an auditors performing his role in lesser dimension than he normally should. There are several areas in insurance accounting and finance, both at the corporate level and operational level that need an auditors focused attention and critical review. However, before embarking on the core area, let us briefly go over the metamorphosis in the area of financial reporting and disclosure requirements of general insurance companies.
PRE IRDA SCENARIO

The provisions of The Insurance Act, 1938 were governing the formats, reporting and disclosure requirements. Besides the financial statements in the pre-designed formats that were to be published for the benefit of the stakeholders, returns were prescribed for submission to the Controller of Insurance. On nationalization of the general insurance industry, the de jure supervisory authority continued to be the Controller of Insurance but the de facto supervisory authority was the General Insurance Corporation of India. In fact, GICs roles were multi fold.
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It was the holding company, the first reinsurer, industrys policy maker, supervisor, de facto regulator et al.
POST IRDA SCENARIO

Came 1999, the IRDA was born. Insurance Act was suitably amended to give IRDA the powers to regulate the industry that was soon to be thrown open to private players. Among the many supplementary regulations that were issued covering many aspects of functioning, the IRDA (Preparation of Financial Statements and Auditors Report of Insurance Companies) regulations, 2000 subsequently replaced by Version 2002, was the one to govern the reporting and disclosure aspects of financials of the insurance companies. Several financial concepts came under major revision and a sea change not only in the reporting and disclosure requirements (as detailed below) but in the very area of concept of premium accounting. Revenue Recognition vis--vis URR provisioning. Premium Deficiency.
Investment Income bifurcation between Policyholders funds and Shareholders funds. IBNER (Incurred but not enough reported) Claims.
Cash flow under Direct Method . Adherence to Accounting Standards with specific modifications.
Concept of Management Report to stress adequate disclosures. Auditors report Revision in Format.
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PREMIUM ACCOUNTING
Now, to see how the financials get affected by the changes of (a) and (b) above and how the auditors so far have dealt with them can be seen below: For time immemorial, the premium accounting was done after providing the Unexpired Risks Reserve at ad-hoc percentages indicated in the Solvency Margin requirements {Sec. 64V(1)(ii)(b)}, which were 40% for Fire, Marine Cargo & Misc and 100% for Marine Hull of Net Premium. [However, as the Income Tax Act & Rules, allowed insurers to provide up to 50% for Fire & Misc and 100% for Marine, many insurers (and, after nationalization, all PSU insurers) took advantage of the same and so provided]. Essentially, this meant that the companies recognized the revenue, by making adjustments for URR in their Net Premium Income (Premium less reinsurances), calling this as Net Earned Premium Income.
IRDA set out to change this. In the first set of Regulations that came out in 2000, it was required that the companies recognized the Premium income over the contract period or the period of risk. Which, simply meant, proportionately. For example, if Rs.3,650/- is collected for a vehicle insurance policy that commenced on 18th Sept, 2003 to expire on 17th Sept, 2004, the revenue recognizable is Rs. 1,950/- for the financial year ending 31st Mar, 2004, as the policy runs its course for 195 days out of 365 days in the current financial year. The balance of Rs. 1,700/- is to be kept as unearned premium, as it is attributable and allocable to the succeeding accounting period. Perhaps, the idea germinated from the perception that in the days of high-end computers and sophisticated methods of accounting, any percentage aphorism in provisioning was not necessary and that the revenue accounting could be almost realistic. IRDAs fresh set of regulations of 2002, possibly realizing that the earlier Regulations on this score were found complicated by the existing and the new insurers alike, sought to grant an escape route by bringing back the adhoc regime, by saying that though the premium recognition should still to be on accrual basis, the minimum of URR should be at percentages prescribed. However, the problem is far from over. First of all, there is an all important point that has been missed by the rule-framers and not also queried by rule-followers. The URR provision, basically, is on the Net basis. For this, only percentages, however adhoc they may seem, can work. Pro-rata recognition of revenue is possible only on Gross premium.
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This is, essentially because, the Reinsurance programmes are not policy wise, except for very major ones. They are, mostly, on treaty basis and the underwriting year for reinsurance markets will be blatantly different from the financial year basis that we might be following. The actual manner in which the whole premium accounting and RI cessions accounting works is too mind boggling to be wished away with any simplistic solutions in the name of bringing in any seeming realism. Many insurers, taking advantage of the situation that actual accrual can never be worked out correctly, simply continue adopting ad-hoc percentages, claiming that they are the minimum. Now, there are myriad practical problems that are encountered by the companies in recognizing the revenue but, the responsibility of auditors is to see that the Regulation is followed scrupulously or if not followed, reported accordingly. If one peruses the published annual reports of the insurance companies for 2002- 03, it can be seen that most of the auditors have conveniently maintained silence on this. What is worse, some nationalized insurers have blatantly changed the rules of the game to suit their convenience during 2001-02 and 2002-03, resulting in huge difference to bottom lines, without eliciting any adverse comment from the auditors. This is perhaps the only industry, where lower business volume in a year can actually result in higher profits because of the reserve release factor. Unless the auditors understand the tricks that can be played by the managements in this, it will not be possible for them to be true and fair to themselves let alone to the shareholders. For the first time, a new concept called Premium Deficiency was brought in by IRDA. Again a measure for augmenting policyholders funds, it mandated that if the sum of expected claims costs, related expenses etc. exceed the URR, the said excess is to be recognized as Premium Deficiency. It is a fact that neither IRDA has attempted to explain the concept of this Premium Deficiency or the methodology of providing the same nor any Insurance Company really appeared to be unduly bothered on this. Some companies have opined that there was no premium deficiency in their companies while some simply disclosed certain sums, even though the regulatory need was to recognize the same in accounts. However, the interesting aspect is that in most cases, the auditors have looked the other way on this issue or simply have gone by the averments made by managements in this regard.
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ESTIMATION OF OUTSTANDING CLAIMS

The most pronounced drain of an insurance companys resources is the Claims cost (also known as Incurred Claims), which is the actual claims paid less adjustments for reinsurance recoveries on them and provisions for claims outstanding as on the date of financial reporting. On the Direct side, the operating offices of the insurance companies are expected to make the provisions based on the available information and create a liability as on the date of closing of books. The sum total of such direct figures, tempered by the Reinsurance recovery adjustments and added by the Outstanding Claims figures received from the Reinsurers, in respect of acceptances would be the total net outstanding claims, which will form the integral and major part of the Claims Cost. However, these are based on estimations based on information in possession of the insurance companies on the date of closing the books. Such information could include surveyors assessments, spot survey reports, insurers guesstimates based on the available documents and sometimes even simply on the data given, not given or short given by the claimants themselves in the claim forms. There are really no hard and fast rules on how to make these provisions and it is left to the discretion and judgment of the claims personnel as also pruning by the managements and hence unlike the URR, which will be a structured estimate, the provision for outstanding claims will always be an unstructured estimate. This not only significantly influences (sometimes, even unduly) the bottom lines but also has the potential to distort the companys liabilities in the Balance Sheet on a given date. the auditors responsibility (both at operational office level and at the central office level) is very pronounced in this area. Only subject knowledge and experience can lead auditors right in their audit of this area.
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COMMISSIONS AND BROKERAGE

At the operational office level, one of the major items of expense is the business procurement cost. In the pre-IRDA days, there were agency commission payments at structured rates and though the system per se was abused to the hilt by the employees of the companies, nothing much could be done by the auditors as everything used to be alright on papers. In the post-IRDA scenario, the private insurance companies resort to ingenious methods of remunerating people, who help them procure business. Though there are official agents and brokers, the outgo towards procurement costs take different forms such as referral fee, consultancy fee etc. Unofficial rebating is also done to grease the palms of decision makers of the insureds. If auditors can be vigilant in this area, many such cases can be brought to light. The auditors, especially at the operational offices, would do well to analyses this account and seek clarifications on payments made to persons other than agents and brokers.
CURRENT ASSETS AND LIABILITIES

When we come to Current Assets and Current Liabilities, it will become necessary to put the concerned accounts under magnifying lens, to understand what the individual balances could broadly contain within them, as it is just possible that anything inconvenient could have been parked in the hazy sub-headlines. For instance, every company will show both in Current Assets and Current Liabilities, the balances with other persons/entities carrying on insurance business. Insurance, being a global business by nature, is all about spread of risks far and wide and hence every insurer parts away certain shares of his premium with other insurers, by way of co-insurance (where the preference of the customer plays a role) as well as by reinsurance, both at home and abroad. Reciprocally, he also accepts risks ceded to him. Wider the spread, better it is for all. However, such transactions between insurers (and reinsurers) mostly take place by way of correspondence and accounting entries only. While the Balance Sheet items refer to the net balances as on a date, the relative effect should have gone to the revenue.
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There are always some transactions pending accounting for want of full information and especially when the number of transactions is huge, there can be understandable differences in balances between entities having such transactions. If periodical reconciliations take place and such pending items are accounted in the way they should be, then there will be some excuse in hiding behind the concepts such as going concern and consistency. But, in reality, such reconciliations never happen and balances are always allowed to mount, with differences ever swelling, resulting in massive sums that should have found their rightful places in the revenue accounts and in P&L accounts of the insurance companies being held captive in capital accounts.
(For instance, a claim settled by company A on behalf of company B is debited to Company B without charging it off to Revenue and because full details are not made available, even the company B does not account it as Claim).
Though, every insurance company has such transactions with hundreds of their counterparts across the globe and such problems are not unique to our country and our insurers alone, certainly it is no excuse that Due to / Due from Insurers continues to be a perpetual legacy of lethargy. However, in the matter of such non reconciliation of balances, charity does not begin at home itself. There are always transactions of (a) claims settled -mostly Marine Cargo & Motor TP claims- by one office of the company on behalf of the other and (b) expenses incurred on behalf of another office. There are eternal issues of non-reconciliation between offices of the same company and at any point of time, significant amounts stand wrongly capitalized in these accounts, commonly called as Inter Office Accounts. Likewise, there is another item called as Agents balances, both in Current Assets and in Current Liabilities. There is no official sanction in the Insurance Act or from IRDA that insurance companies can have running balances with agents. In fact, no agent is authorized to collect any money on behalf of the company. At best, there can be one months commission dues that may stand as credit balances. Or there could be continuing aberrations of what has long since been prohibited viz., balances under Agents bank guarantees. But, the actual extents of such balances defy such perceptions. Whether these balances are what they are really supposed to be or whether the head of account is a convenient parking place for several Para-revenue items, pending (forever?) accounting as revenue etc. are but kept as closely guarded secrets, even from auditors, who will be constantly pressurized to complete the audits in the time
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frame set by the managements. Yes, the only reconciliation appears to be in the attitude of the statutory auditors, as it is seen that they are reporting this as nonchalantly as possible year after year. As many of the readers of the financials do not realize the impact, no serious questions are asked from any quarters.
OTHER ISSUES
Some of the other important issues at the operational office level are verification of compliance of Sec. 64VB of the Insurance Act, which deals with collection of premium prior to assumption of risk, bank reconciliations, operation of Bank Guarantee Premium Control account, Cash Deposit Premium Control account, refunds accounting, verification of fixed assets, cash, policy stamps etc. The Audit programme will have to factor in all of the above issues for detailed scrutiny.
INVESTMENTS & REINSURANCE

Audit of the investment as well as reinsurance activities happen only at the Corporate Office levels and here, the scope for auditors is well defined by the relevant Regulations of IRDA. However, the objective of the IRDAs regulations on Investments is only the protection of policyholders funds. IRDA has stipulated that every insurer shall constitute an Investment Committee and shall draw up an annual Investment Policy which shall be placed before the Board for approval after being vetted by the Investment Committee. The Investment Policy, as approved by the Board shall also be filed with the IRDA. Schedule B of Regulation 3 of The IRDA (Preparation of financial Statements and Auditors Report of Insurance Companies) Regulations, detailing the accounting principles for preparation of financial statements provided for the procedure for valuation of investments, provisioning and impairment norms, recognition of income, disclosures forming part of financial statements etc. which reflect the intention of the Regulators to bring in more transparency in presentation.
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Audit of investments will have to be a very detailed one and critical areas like investment in unapproved investments(within the permissive limits), disinvestments and selling the traded securities etc. will have to be brought under careful scrutiny. Reinsurance is a highly technical area and unless the auditors get very well versed in verification of Bordereaux (a spreadsheet kind statement detailing risks ceded / accepted, commissions, claims etc.), checking of quarterly statements of individual treaty reinsurers, profit commission statements etc. it may not at all be possible to do justice in this area. The one important thing that needs to be borne in mind by the auditors is that reinsurance transactions operate between companies at the international level based on a very high level of trust (concept of utmost good faith fortified) and the reinsurers place heavy reliance on the quality of the auditors who attest the financials of the Indian companies, which fact only increases the responsibility of the auditors.
AUDIT EMPANELMENT REQUIREMENTS

Prior to the private sector entry, the appointments of auditors for the four PSU companies were made by the CAG. In the current scenario where private insurers have begun operating, the appointment of auditors appears to have come within the ambit of functions of the IRDA, in terms of the regulations on preparation of financial statements and auditors report under the IRDA Act. Here, the IRDA Act does not make any distinction between Public Sector and Private Sector Insurance Companies. (However, to what extent the said Regulations notified under the sanction given under Sec. 114 A of the Insurance Act, which in itself does not specifically state anything on auditors appointment, can overrule the provisions of Companies Act is not clear.) Accordingly, IRDA has started compiling a panel of Chartered Accountants and for the purpose, has also prescribed certain exacting parameters for such empanelment. Of course, in such parameters, the longevity, size etc. of a firm seem to be only given importance rather than the specialized qualifications in the field or the domain expertise of the partners. This is rather sad. An industry that is so unique and important cannot be audited casually and generally, when specialization is the order of the day.
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Realizing the importance of the need to create and develop domain expertise in this industry that is all set to take a giant leap in the years to come, our Institute has newly introduced a specialized post qualification course on insurance and risk management. Providing assurance services to the people who are themselves in the business of assuring others is a serious affair and the responsibility of the members of our profession to provide comfort (by doing an informed audit) to the stakeholders, regulator, reinsurers, tax authorities can hardly be overemphasized.
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CONCLUSION
Audit is necessary for all companies registered under companies act. Every company has to appoint an auditor for keeping audit. Audit helps companies to know where they are standing. Audit helps to know their expanses, income, assets, and liabilities of the company. Auditor is a person appointed by insurance company to keep the records. An audit is an examination of numerical data relating to business with the help of principles stated. The financial statements are prepared under the historical cost convention, on the accrual basis of accounting save for revenue recognition on cash basis as explained hereunder, and in accordance with the applicable standards on accounting issued by the Institute of Chartered Accountants of India. As we know that insurance is the most in every ones life, so if any mistake happens in auditing insurance companies audit it will effect directly to every ones life. Insurance business is an emerging market. So, proper maintenance of a records is musyt for ensuring more growth for the sector. If accounts are maintained properly than only from the data we can estimate the future of insurance business.
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TYBBI

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

OBJECTIVES & SCOPE OF FINANCIAL STATEMENT AUDIT

TYBBI 1. PRIMARY OBJECTIVE :-

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

STEPS FOR PLANNING AN AUDIT

AUDITING IN BANKING & INSURANCE

STEPS IN A SAMPLING PLAN

AUDITING IN BANKING & INSURANCE

EXTERN AL (STATUT ORY) DUE DILIGEN CE INTERNA L

FINANCI AL STATEM ENT

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

QUALIFICATION & DISQUALIFICATION OF AUDITORS [Section 226]

AUDITING IN BANKING & INSURANCE

GENERAL RULE OF APPOINTMENT

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

CEILING ON NUMBER OF COMPANY AUDITS

AUDITING IN BANKING & INSURANCE

APPOINTMENT & RE-APPOINTMENT OF AUDITOR BY SPECIAL RESOLUTION

AUDITING IN BANKING & INSURANCE

RE-APPOINTMENT OF RETIRING AUDITOR

AUDITING IN BANKING & INSURANCE

FINANCIAL STATEMENTS AUDIT OF BANKS

AUDITING IN BANKING & INSURANCE

ROLE OF RBI IN CASE OF BANK AUDIT

AUDITING IN BANKING & INSURANCE

AUDIT OF BANKING COMPANIES

Banking companies(acquisition &

AUDITING IN BANKING & INSURANCE

Non- nationalized bank

Regional rural bank State bank of India

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

APPOINMENT OF AUDITOR OF BANKING COMPANY

AUDITING IN BANKING & INSURANCE

PRIVILEGES OF REGISTERED SOCIETIES:

The following are privileges which a registered society can enjoy:

AUDITING IN BANKING & INSURANCE

NAMES OF AUDIT FIRMS APPROVED FOR APPOINTMENT AS STATUTORY

CENTRAL BANK OF INDIA

AUDITING IN BANKING & INSURANCE

INDIAN OVERSEAS BANK

AUDITING IN BANKING & INSURANCE

GUIDANCE NOTE ON AUDIT OF BANKS (REVISED 2008)

AUDITING IN BANKING & INSURANCE

BANKING & FINANCIAL ACTIVITIES AND RISKS:

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

AUDITING IN BANKING & INSURANCE

CONCLUSION FOR BANK AUDIT